Home » 2008 Issues » December 03, 2008 » INS-49-08-00002-E Minimum Standards for Determining Reserve Liabilities and Nonforfeiture Values for Preneed Life Insurance
INS-49-08-00002-E Minimum Standards for Determining Reserve Liabilities and Nonforfeiture Values for Preneed Life Insurance
12/3/08 N.Y. St. Reg. INS-49-08-00002-E
NEW YORK STATE REGISTER
VOLUME XXX, ISSUE 49
December 03, 2008
RULE MAKING ACTIVITIES
INSURANCE DEPARTMENT
EMERGENCY RULE MAKING
I.D No. INS-49-08-00002-E
Filing No. 1125
Filing Date. Nov. 13, 2008
Effective Date. Nov. 13, 2008
Minimum Standards for Determining Reserve Liabilities and Nonforfeiture Values for Preneed Life Insurance
PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:
Action taken:
Addition of Part 102 (Regulation 192) to Title 11 NYCRR.
Specific reasons underlying the finding of necessity:
Regulation No. 192 needs to be adopted by December 31, 2008 for the general welfare.
Based on research conducted by the Deloitte University of Connecticut Actuarial Center and commissioned by the Society of Actuaries as a part of a study of preneed mortality, it was determined that reserves calculated using the 2001 CSO Mortality Table were inadequate for preneed policies. Development of a new valuation mortality table specifically designed for and based on preneed life insurance experience is currently being developed by the Society of Actuaries, but will not be ready for adoption prior to the mandatory use for both statutory and federal tax purposes of the 2001 CSO Mortality Table beginning on January 1, 2009. This regulation, which requires the use of the Ultimate 1980 CSO Mortality Table, subject to the conditions in the regulation, therefore is intended as an intermediate solution until such time that an adequate mortality table can be adopted. Adoption of this regulation will require insurers to hold statutory reserves at a level that are more appropriate for preneed life insurance products. Adoption of similar provisions by at least 25 other states will permit the alternative use of the Ultimate 1980 CSO Mortality Table for federal tax purposes as well.
If this regulation is not adopted by year-end, New York residents will be adversely affected, particularly those residents who have or will purchase policies to fund out-of-state burials, often near other members of their families. Without this regulation, it is likely that the higher reserves maintained to adequately fund these policies will result in a failure of these policies to qualify as life insurance for federal tax purposes, with the consequence that the death benefit will be taxable to the beneficiary and the insurer will face a higher tax burden.
This difficulty arises from the tension between the states' interest in ensuring solvency and adequate capital and the federal tax law's interest in limiting the maximum deduction for reserves supporting life insurance contracts. States generally require high reserves, while the federal tax law mandates standards that produce lower reserves (and thus deductions). Further, under the federal Internal Revenue Code (IRC), reserves for life insurance policies can only fund standard mortality charges. Higher mortality charges are permitted for federal tax purposes only if the individual insured is determined to be substandard. Because preneed life insurance policies are generally purchased by individuals who feel funeral costs may well be imminent, the entire category of insureds is felt to be substandard and thus to require uniformly higher charges.
If a special (higher charge) mortality table becomes the prevailing mortality table for federal tax purposes for this specific category of life insurance, then federal tax law will allow the higher reserves that the states feel are necessary for preneed life insurance policies. The exception to the 2001 CSO Mortality Table can only be used for federal tax purposes, however, if it is adopted by 26 or more states before January 1, 2009. If the mortality table is timely adopted, then the reserves permitted by both New York and the IRC will be high enough to pay for the higher future mortality charges. Further, insurers no longer will face the higher taxes that would result from a mismatch between statutory and tax reserves.
For all of the reasons stated above, an emergency adoption of Regulation No. 192 is necessary for the general welfare.
Subject:
Minimum standards for determining reserve liabilities and nonforfeiture values for preneed life insurance.
Purpose:
To establish minimum standards for determining reserve liabilities and nonforfeiture values for preneed life insurance.
Text of emergency rule:
A new Part 102 is added to read as follows:
Section 102.1 Purpose
The purpose of this Part is to prescribe rules establishing minimum standards for reserves and nonforfeiture values for preneed life insurance in accordance with statutory reserve formulae.
Section 102.2 Applicability
This Part shall apply to every authorized life insurance company and licensed fraternal benefit society in this State and every insurer holding a certificate from the superintendent as being accredited for the reinsurance of life insurance (all hereafter referred to as insurers). This Part shall be applicable to such insurers for all statements filed after the effective date of this Part.
Section 102.3 Definitions
(a) 2001 CSO Mortality Table has the meaning contained in section 100.3(a) of Part 100 of this Title (Regulation 179).
(b) Actuarial Opinion has the meaning contained in section 95.4(a)(1) of Part 95 of this Title (Regulation 126).
(c) Actuarial Memorandum means the memorandum filed in support of the actuarial opinion. The form and substance of the actuarial memorandum shall be the same as that described in section 95.9 of this Title.
(d) Appointed Actuary has the meaning contained in section 95.4(e) of this Title.
(e) Preneed life insurance means any life insurance policy or certificate that is issued in combination with, in support of, with an assignment to, or as a guarantee for, a prearrangement agreement for goods and services, or other benefits, to be provided at the time of and immediately following the death of the insured. Goods and services may include embalming, cremation, body preparation, viewing or visitation, coffin or urn, memorial stone, and transportation of the deceased. The status of the policy or certificate as preneed life insurance is determined at the time of issue in accordance with the policy form filing.
(f) Ultimate 1980 CSO Mortality Table means the mortality table without ten-year select mortality factors, consisting of separate rates of mortality for male and female lives, developed by the Society of Actuaries Committee to Recommend New Mortality Tables for Valuation of Standard Individual Ordinary Life Insurance, incorporated in the 1980 National Association of Insurance Commissioners (NAIC) Amendments to the Model Standard Nonforfeiture Law and Standards Valuation Law for Life Insurance, and referred to in those models as the Commissioners 1980 Standard Ordinary Mortality Table without ten-year select mortality factors.
Section 102.4 Minimum Valuation Standards
(a) Minimum valuation mortality standard:
For preneed life insurance, the minimum standard for determining reserve liabilities and nonforfeiture values for both male and female insureds shall be the Ultimate 1980 CSO Mortality Table subject to the transition rules provided in section 102.5 of this Part.
(b) Minimum valuation interest rate standards:
(1) The interest rates used in determining the minimum standard for valuation shall be the calendar year statutory valuation interest rates as defined in section 4217(c)(4) of the Insurance Law.
(2) The interest rates used in determining the minimum standard for nonforfeiture values shall be the nonforfeiture interest rates as defined in section 4221(k)(10) of the Insurance Law.
(c) Minimum valuation method standards:
(1) The method used in determining the standard for the minimum valuation of reserves shall be the Commissioners Reserve Valuation Method as defined in section 98.3(b) of Part 98 of this Title (Regulation No. 147).
(2) The method used in determining the standard for the minimum nonforfeiture values shall be the method defined in section 4221(l)(3) of the Insurance Law.
Section 102.5 Transition Rules
(a) For a preneed policy or certificate issued on or after January 1, 2009 and before January 1, 2012, the 2001 CSO Mortality Table may be used as the minimum standard for reserves and nonforfeiture benefits for both male and female insureds.
(b) If an insurer elects to use the 2001 CSO Mortality Table as a minimum standard for any preneed policy or certificate issued on or after January 1, 2009 and prior to January 1, 2012, the insurer shall provide, as part of the actuarial opinion and memorandum submitted in support of the insurer's asset adequacy testing as specified in Part 95 of this Title, an annual written notification of such use to the superintendent. The notification shall include:
(1) A complete list of all preneed life insurance policy forms that use the 2001 CSO Mortality Table as a minimum standard;
(2) A certification signed by the appointed actuary stating that the reserve methodology, which is employed by the insurer in determining reserves for preneed life insurance issued after January 1, 2009 and using the 2001 CSO Mortality Table as a minimum standard, develops adequate reserves. For the purposes of this certification, the preneed life insurance using the 2001 CSO Mortality Table as a minimum standard cannot be aggregated with any other policies and certificates; and
(3) Supporting information regarding the adequacy of reserves for preneed life insurance issued on or after January 1, 2009 and using the 2001 CSO Mortality Table as a minimum standard for reserves.
(c) A preneed life insurance policy or certificate issued on or after January 1, 2012 shall use the Ultimate 1980 CSO Mortality Table in the calculation of minimum reserves and minimum nonforfeiture values.
This notice is intended
to serve only as a notice of emergency adoption. This agency intends to adopt this emergency rule as a permanent rule and will publish a notice of proposed rule making in the State Register at some future date. The emergency rule will expire February 10, 2009.
Text of rule and any required statements and analyses may be obtained from:
Andrew Mais, Insurance Department, 25 Beaver Street, New York, NY 10004, (212) 480-2285, email: amais@ins.state.ny.us
Regulatory Impact Statement
1. Statutory authority:
The Superintendent's authority derives from sections 201, 301, 1304, 1308, 4217, 4218, 4221, 4240 and 4517 of the Insurance Law.
These sections establish the Superintendent's authority to promulgate regulations governing reserve requirements for life insurers and fraternal benefit societies. Sections 201 and 301 of the Insurance Law authorize the Superintendent to effectuate any power accorded to him by the Insurance Law, and prescribe regulations interpreting the Insurance Law.
Section 1304 of the Insurance Law enables the Superintendent to require any additional reserves as necessary on account of life insurers' policies and certificates.
Section 1308 of the Insurance Law describes when reinsurance is permitted, and the effect that reinsurance will have on reserves.
Section 4217 requires the Superintendent to annually value, or cause to be valued, the reserve liabilities ("reserves") for all outstanding policies of every life insurance company doing business in New York. Section 4217(a)(1) specifies that the Superintendent may certify the amount of any such reserves, in particular the mortality table or tables, rate or rates of interest and methods used in the calculation of the reserves.
Section 4217(c)(6)(C) provides that reserves according to the commissioners reserve valuation method for life insurance policies providing for a varying amount of insurance or requiring the payment of varying premiums shall be calculated by a method consistent with the principles of section 4217(c)(6).
Section 4217(c)(6)(D) permits the Superintendent to issue, by regulation, guidelines for the application of the reserve valuation provisions for section 4217 to such policies as the Superintendent deems appropriate.
Section 4217(c)(9) requires that, in the case of any plan of life insurance that provides for future premium determination, the amounts of which are to be determined by the insurance company based on then estimates of future experience, or in the case of any plan of life insurance that is of such a nature that the minimum reserves cannot be determined by the methods described in section 4217(c)(6) and section 4218, the reserves that are held under the plan must be appropriate in relation to the benefits and the pattern of premiums for that plan, and be computed by a method that is consistent with the principles of sections 4217 and 4218, as determined by the Superintendent.
Section 4218 requires that when the actual premium charged for life insurance under any life insurance policy is less than the modified net premium calculated on the basis of the commissioners reserve valuation method, the minimum reserve required for the policy shall be the greater of either the reserve calculated according to the mortality table, rate of interest, and method actually used for the policy, or the reserve calculated by the commissioners reserve valuation method replacing the modified net premium by the actual premium charged for the policy in each contract year for which the modified net premium exceeds the actual premium.
Section 4221(k)(9)(B)(vi) permits, for policies of ordinary insurance, the use of any ordinary mortality table, adopted by the National Association of Insurance Commissioners after 1980, and approved by the Superintendent, for use in determining the minimum nonforfeiture standard.
Section 4517(b)(2) provides, for fraternal benefit societies, that reserves according to the commissioners reserve valuation method for life insurance certificates providing for a varying amount of benefits, or requiring the payment of varying premiums, shall be calculated by a method consistent with the principles of subsection (b).
2. Legislative objectives:
Maintaining solvency of insurers doing business in New York is a principal focus of the Insurance Law. Solvency serves several critical functions. One purpose of the Insurance Law is to ensure that all insurers and fraternal benefit societies authorized to do business in New York State, and insurers holding a certificate from the Superintendent that allows them to reinsure life insurance, hold the necessary reserve funds to the obligations made to policyholders. Insurers and policyholders also benefit from the Insurance Law's mandate to maintain adequate capital for company uses such as expansion, product development, and other forms of business development.
3. Needs and benefits:
Prior to 2004, the 1980 CSO Mortality Table was the minimum standard for calculating life insurance reserves and nonforfeiture values. Regulation No. 179 (11 NYCRR Part 100), adopted in 2004, established new minimum standards for both life insurance reserves and nonforfeiture values. That regulation allows the optional use of the 2001 CSO Mortality Table for all policies issued on or after January 1, 2004 and prior to January 1, 2009, and requires the use of the 2001 CSO Mortality Table for all policies issued on or after January 1, 2009. As of January 1, 2009, use of the 2001 CSO Mortality Table will be mandatory for both statutory and tax purposes.
This regulation establishes minimum reserve and nonforfeiture standards for preneed life insurance policies and certificates. Preneed life insurance provides a prearrangement agreement for goods and services to be provided at the time of death of the insured.
Based on research conducted by the Deloitte University of Connecticut Actuarial Center and commissioned by the Society of Actuaries as a part of a study of preneed mortality, it was determined that reserves calculated using the 2001 CSO Mortality Table were inadequate for preneed policies. Development of a new valuation mortality table specifically designed for and based on preneed life insurance experience is currently being developed by the Society of Actuaries, but will not be ready for adoption prior to the mandatory use of the 2001 CSO Mortality Table on January 1, 2009. This regulation therefore is intended as an intermediate solution until such time that an adequate mortality table can be adopted.
The regulation allows for the continued use of the 2001 CSO Mortality Table on an optional basis for preneed life insurance policies and certificates issued on or after January 1, 2009 and through December 31, 2011. For all preneed life insurance policies and certificates issued on or after January 1, 2012, the minimum standard will be the Ultimate 1980 CSO Mortality Table. This transition period allows those insurers currently using the Ultimate 1980 CSO Mortality Table as the minimum standard to continue using that table. Reserves produced under the table are more conservative than those calculated under the 2001 CSO Mortality Table.
As an additional safeguard during the transition period, any insurer using the 2001 CSO Mortality Table will need to provide an annual certification and supporting analysis that the reserves calculated on that basis are adequate on a stand-alone basis. The transition period also allows those insurers that have already converted their policy forms and valuation systems to reflect the 2001 CSO Mortality Table ample time to have revised policy forms approved by the various state insurance departments in which the insurers write business.
The regulation is necessary to help ensure the solvency of life insurers and fraternal benefit societies doing business in New York by providing an appropriate mortality table to be used for valuing reserves for preneed life insurance policies and certificates.
4. Costs:
Administrative costs to most life insurers, fraternal benefit societies, and insurers holding a certificate from the Superintendent that allows them to reinsure life insurance (hereafter, "insurers") will be minimal, since many insurers already have made modifications to allow the use of the 2001 CSO Mortality Table with the adoption of Regulation No. 179 in 2004. Nevertheless, the adoption of the special use table may require minimal costs associated with the revision of policy forms. Based on correspondence with an insurer that is a major writer of preneed insurance, the Department estimates the cost to be approximately $1,000, plus any filing fees charged by the state in which the form is filed.
Costs to the Insurance Department will be minimal, as existing personnel are available to verify that the appropriate reserves are held by insurers. There are no costs to other government agencies or local governments.
5. Local government mandates:
The regulation imposes no new programs, services, duties or responsibilities on any county, city, town, village, school district, fire district or other special district.
6. Paperwork:
The regulation imposes reporting requirements related to the actuarial opinion and memorandum required for insurers using the 2001 CSO Mortality Table as the minimum standard for preneed life insurance policies and certificates issued on or after January 1, 2009 and prior to January 1, 2012.
7. Duplication:
The regulation does not duplicate any existing law or regulation.
8. Alternatives:
The only significant alternative considered was to allow the 2001 CSO Mortality Table to become the mandatory basis for minimum standards for reserves and nonforfeiture benefits, which would produce inadequate reserves for some insurers.
A copy of the draft regulation was distributed to the Life Insurance Council of New York (LICONY) in July 2008. LICONY is a trade association representing life insurance companies domiciled in the state of New York. LICONY suggested that the original definition of preneed insurance was too broad because it included references to annuity contracts and other insurance contracts. The Department agreed with LICONY and removed both references from the definition. A revised draft of the regulation, reflecting such changes was sent to LICONY in August 2008, and LICONY had no objections to the revised draft regulation.
A copy of the draft regulation was sent to the National Fraternal Congress of America (NFCA) in September 2008. NFCA is a trade association representing fraternal benefit societies in the United States and Canada. NFCA commented that the requirements in the proposed regulation appear to be reasonable.
9. Federal standards:
There are no federal standards in this subject area other than the general requirement under federal tax law to use 2001 CSO Mortality Tables to calculate federal tax reserves for all life insurance contracts on or after January 1, 2009. Implementation of this emergency regulation will, in conjunction with similar actions by at least 25 other states, create an exception to this general rule for preneed contracts.
10. Compliance schedule:
Compliance with this regulation with respect to the 2001 CSO Mortality Table is voluntary for all preneed life insurance policies and certificates issued on or after January 1, 2009 and prior to January 1, 2012. Insurers that are currently using the more conservative Ultimate 1980 CSO table may continue to do so for policies issued on or after January 1, 2009 and prior to January 1, 2012. Insurers must use the Ultimate 1980 CSO Mortality Table for all preneed life insurance policies and certificates issued on or after January 1, 2012, which will allow insurers subject to the regulation ample time to achieve full compliance.
Regulatory Flexibility Analysis
1. Small businesses:
The Insurance Department believes that this rule will not impose any adverse economic impact on small businesses and will not impose any reporting, recordkeeping or other compliance requirements on small businesses. The basis for this belief is that this rule is directed at all life insurers and fraternal benefit societies authorized to do business in New York State and insurers holding a certificate from the Superintendent that allows them to reinsure life insurance, none of which falls within the definition of "small business" set forth in section 102(8) of the State Administrative Procedure Act. Indeed, the Insurance Department has reviewed filed Reports on Examination and Annual Statements of these insurers, and believes that none of them falls within the definition of "small business", because there are none that are both independently owned and have under one hundred employees.
2. Local governments:
The regulation does not impose any impacts, including any adverse impacts, or reporting, recordkeeping, or other compliance requirements on any local governments.
Rural Area Flexibility Analysis
The Insurance Department finds that this rule does not impose any significant burden on persons located in rural areas, and the Insurance Department finds that it will not have an adverse impact on rural areas.
The entities covered by this regulation, life insurers and fraternal benefit societies licensed to do business in New York State, do business in every county in this state, including rural areas as defined under SAPA 102(10). Administrative costs to most life insurers, fraternal benefit societies, and insurers holding a certificate from the Superintendent that allows them to reinsure life insurance will be minimal, since many insurers began to use all versions of the 2001 CSO Mortality Table with the adoption of Regulation No. 179 in 2004. Nevertheless, the adoption of this special use table may require minimal costs associated with the revision of policy forms. Based on correspondence with an insurer that is a major writer of preneed insurance, the Department estimates each insurer's costs to be approximately $1,000, plus any filing fees charged by the state in which the form is filed.
Job Impact Statement
Adoption of Regulation 192 will not adversely impact job or employment opportunities in New York. The rule is likely to have no measurable impact on jobs and employment opportunities because existing personnel should be able to monitor the insurer's compliance with the new requirements. There should be no region in New York which would experience an adverse impact on jobs and employment opportunities. This rule would not have a measurable impact on self-employment opportunities.
